2/10/2005 @ 11:05AM

The Best And Worst 529 Plans

As with most things in life, it pays to shop around while looking for a 529 College Savings Plan. Unfortunately, most investors choose their home-state’s plan. And although many states offer incentives to their residents, many times those aren’t the best fit.

To sort through the good and the bad, Morningstar, a Chicago-based provider of independent investment research, came up with a list of best and worst 529s. The list was detailed in the February issue of Morningstar FundInvestor.

The worst plans are offered by Alabama, Arizona, Maine, Tennessee and Wyoming.

While Alaska, Michigan and Utah offer the best direct-sold 529 College Savings Plans, the survey by Morningstar concluded. The best broker-sold 529 Plans are Colorado Scholars Choice College, Kansas Learning Quest Education and Virginia CollegeAmerica.

The Worst 529 Savings Plans
Source: Morningstar *Cost for A shares, not including front-end load.

State

Primary Fund Provider

Asset-Based Costs

Asset-Based Range (%)

Quality of Core Investment Options

Investment Flexibility

Shareholder Friendliness

Alabama

Van Kampen

High

0.70-2.10*

Fair

Fair

Poor

Arizona

Waddell&Reed/SM&R/Pacific

High

0.49-2.10*

Fair

Poor

Fair

Maine

Merrill Lynch/AIM/Franklin/MFS

High

0.48-1.98*

Fair

Good

Fair

Tennessee

TIAA-CREF

Average

0.95

Good

Fair

Good

Wyoming

Merrill Lynch/MFS

High

1.80-2.43*

Fair

Fair

Fair

Best Direct-Sold 529 Savings Plans
Source: Morningstar

State Plan

Primary Fund Provider

Asset-Based Costs

Asset-Based Range (%)

Quality of Core Investment Options

Investment Flexibility

Shareholder Friendliness

Alaska T. Rowe Price College

T. Rowe Price

Below Average

0.75-1.03

Excellent

Good

Excellent

Michigan Education

TIAA-CREF

Low

0.65

Good

Fair

Good

Utah Educational

Vanguard

Low

0.00-0.42

Excellent

Good

Excellent

Best Broker-Sold 529 Savings Plans
Source: Morningstar *Cost for A shares, not including front-end load.

State Plan

Primary Fund Provider

Asset-Based Costs

Asset-Based Range (%)

Quality of Core Investment Options

Investment Flexibility

Shareholder Friendliness

Colorado Scholars Choice College

Smith Barney

Average

0.85-1.34*

Good

Good

Fair

Kansas Learning Quest Education

American Century

Average

0.47-1.39*

Good

Good

Good

Virginia CollegeAmerica

American

Below Average

0.66-1.26*

Excellent

Excellent

Excellent

“The Utah Education Savings Plan continues to set the standard for low costs among 529 plans,” Morningstar said. “Over five other states that offer cheap Vanguard index funds, Utah earns kudos for keeping total costs down by tackling the administrative burden itself–charging only 0.25%–and it doesn’t levy anything at all for choosing its money market option.”

Morningstar said the Michigan Education Savings Plan and the Alaska T. Rowe Price College Savings Plan also keep costs low.

About 80% of 529 Plans are invested through financial advisors. This means investors pay a sales charge and get hit with annual expenses. In this sector, Morningstar singled out the Kansas Learning Quest Education Savings Plan because it offers three investment tracks–conservative, moderate and aggressive–and each offers seven aged-based portfolios. Morningstar called the plan’s 0.39% management fee a “bit steep” but praised its “solid management.”

Morningstar called Virginia CollegeAmerica the best plan sold by brokers. It offers investors the choice of 21 American Funds, giving brokers the ability to craft portfolios to individual needs.

“That flexibility and the plan’s cheap price tag, give it the edge for most investors who use an advisor,” Morningstar said.

The Colorado Scholars Choice College Savings Program received high marks for moderate expenses and strong fund choices. Morningstar said Colorado waives the $20 annual maintenance fee for accounts with at least $2,500 invested and annual costs for the priciest of the age-based options top out at 1.14%. The funds are managed by
Citigroup
.

On the downside, Morningstar said plans offered by Arizona and Wyoming are among the most expensive.

Wyoming charged a 0.95% annualized program management fee plus the cost of the underlying funds, a price that Morningstar called “obscene.”

Morningstar called the plans offered by Alabama and Tennessee “sub-par” and noted that neither offers a meaningful tax break to keep investors’ money at home.

“Alabama’s plans still do not conform to federal tax treatment and therefore may be subject to state tax,” Morningstar said. “Tennessee charges a relatively pricey 0.95% annually for basically the same TIAA-CREF plan that a host of other states offer at cheaper prices.”

Morningstar said Maine’s program doesn’t measure up on close inspection.

“Although its matching grant program–which contributes $200 annually to residents with income less than $52,500 who have a minimum account balance of $1,000–may see noble, it’s not as good as it sounds,” Morningstar concluded. “With a 0.50% annual management fee on top of a stable of overpriced–and middling–fund options, the state and its providers may be taking out of one pocket nearly as much as they’re handing out to some low-income residents in the other.”

In addition to state plans, check the college savings plans offered by mutual fund companies such as Fidelity, Legg Mason or Putnam Investments. Major banks, including
Wells Fargo
and
Bank of America
are also a good source of information.

In the original version of this story, Maine’s expense data in the table was misstated.